Volume 2008,
Issue 68,
2008

Over 50 years ago John Lintner (1956) published a study of corporate dividend policy in which he found that firms typically set long-term target dividend payout ratios and that dividend changes tend to lag earnings changes in order to give management time to assess the permanence of any earnings rises. Five years later Miller and Modigliani (1961) demonstrated that in perfect, frictionless markets investors should be indifferent to receiving their returns in the form of dividends or price appreciation. During the intervening four decades much effort was put into developing a theory of dividend policy and into an associated body of empirical work.

In 2005 Brav, Graham, Harvey and Michaely published a comprehensive survey of US corporate dividend policy. Their objective was to establish whether Lintner's findings remained relevant at the start of the 21st century and to shed light on the consistency between modern theories and the practice of corporate dividend policy.
In this paper we review the work done on dividend policy in South Africa over the past 25 years and compare and contrast the results obtained in applying Brav et al. (2005)'s questionnaire to a sample of South African listed companies.

Various studies conducted in the United States (US) have documented several anomalies with initial public offerings (IPOs). Ibbotson (1975) and Ritter (1984, 1991) document short-run underpricing, cyclical "hot issue" markets and long-run underperformance.

These findings are not peculiar to the US. Long run IPO underperformance is documented in the United Kingdom (UK) (Levis, 1993), and Brazil (Aggarwal, Leal and Hernandez, 1993). In South Africa research on IPO performance on the Johannesburg Securities Exchange (JSE) has produced mixed results (Lawson, 1996 and M'kombe and Ward, 2002). These contradictory findings indicate that the long run performance of IPOs varies over time and long-run returns are sensitive to the sample period and methodology used (Ritter and Welch, 2002 and Brav, 2000).
This study examines the change in operating performance of 391 firms that listed on the JSE between 1990 and 2003. Using a fixed-effects panel data regression model, factors such as the changes in profitability, investment and growth, tax, leverage and cost of credit are examined over a three year period. Profitability of IPO firms declines significantly in the third year after listing. In addition, tax payments increase permanently and significantly. These results are consistent with findings by Pagano, Panetta and Zingales (1998) and Jain and Kini (1994). Moreover, they are also consistent with M'kombe and Ward (2002)'s results of long-run underperformance of South African IPOs and Ritter (1991) and Loughran and Ritter (1995)'s discovery of long-run IPO underperformance in the US. Similar to Ritter's (1991) results, IPO volume in the South African market fluctuates. The highest concentration of IPOs occurred during the technology fuelled bull market of 1998 and 1999 whereas the lowest concentration occurred during the global recession of 2001 to 2003.

Hedge Funds, Asset Managers and Traders that participate in option markets are all exposed to changes in implied volatility, as these changes directly affect the value of an option. In general, implied volatility σK (t, s) is a forecast of an asset's return uncertainty over a specified future time period t , implied from the price of an option (strike level: K, market level: S).

Alexander (2001a&b) considers the risk implications of these 'changes in implied volatility'. She constructs a model that explains volatility change (particularly volatility skew) as a result of three dominant effects : trend, slope and convexity. Her model has some appeal in that these independent factors are readily understandable and their effect on an option's price can be calculated independently.
Decomposing volatility risk in this way benefits both option traders and risk managers. The intention is to explore these benefits in an emerging market setting by applying Alexander's implied volatility model to the less liquid South African Top40 option market.

Empirical evidence shows that the phenomenon of responsible investing (RI) is gradually moving from a fringe investment strategy to a mainstream consideration in the global investment arena (Knoll, 2002:681; Schueth, 2003:189). Responsible investing essentially refers to a set of approaches which include moral as well as environmental, social and corporate governance (ESG) considerations along with conventional financial criteria in decisions regarding the selection, retention and realisation of particular investments (Mansley, 2000:3).

The theory of the firm regards investment decisions as one of the fundamental and central activities of the modern firm. The normative aspect of the theory claims that firm resources should be allocated to value-creating positive NPV projects. The current literature has mostly focused on managerial behaviour in advanced economies and has reported evidence that shareholder wealth is positively affected when firms make capital spending decisions (Woolridge (1988) and McConnell and Muscarella (1985)).

Recent work by La Porta, Lopez-de-Silanes, Shleifer and Vishney (2002) and Shleifer and Vishney (1997) document that corporate environments in emerging economies differ quite significantly from those in advanced economies. Claessens, Djankov, and Lang (2000) also report that many emerging markets are dominated by companies which have high ownership / asset concentration, and which are large in size and function as conglomerates. Berger and Ofek (1995) suggest that greater agency costs are incurred when firms engage in conglomeration. Accepting negative net present value projects and misallocating resources toward inefficient divisions are a manifestation of these agency costs, which negatively impact firm value (Jensen and Meckling (1976) and Mansi and Reeb (2002)). Insights from the published literature imply that these problems are likely to be more severe for firms that are operating in countries with majority share ownership and asset concentration, suggesting that the nature of managerial decisions made in emerging economies require empirical examination.
This paper has three aims. The first is to conduct an event study of capital investment announcements to measure whether the investment decisions of South African companies are consistent with the goal of maximizing shareholder wealth. The second aim is motivated by a unique attribute of the South African economy. In addition to being classified as an emerging market, the South African economy is also dominated by large groups of holding companies, which are highly diversified (Castle and Kantor, 2000). Many of these conglomerates are managed by founding families and their descendents (Kantor, 2001). It has been reported that many local companies stray from their core activities into diversifications that lack any business logic (Gerson, 1992). In light of these important characteristics of the South African business structure, this paper also examines whether the wealth effects of capital expenditure announcements differ between diversified firms and focused firms. The third aim of this paper is to investigate whether the market reaction to capital expenditure announcements varies with the category of projects being announced, as well as other characteristics of the investment and the company making the announcement.